House Financial Services Committee Chair Patrick McHenry (R-N.C.) and members of the committee wrote to Federal Reserve Chair Jerome Powell, urging him to retract and reintroduce the agency’s Basel III Endgame rulemaking. Many financial industry insiders expect the Fed to do so amid widespread pushback on its provisions.
The committee noted Powell indicated he supported reproposing the capital standards rules for financial institutions and expressed concern, on behalf of Republicans on the committee, that the Fed may be considering only reproposing part of the rule.
“To be sure, the vast majority of comment letters on the current proposal, sent by stakeholders from across the ideological spectrum and sectors of the economy, support a withdrawal, re-proposal, or otherwise express significant concerns with the proposal,” the committee wrote. “We are concerned by ongoing reports that the Federal Reserve will seek an as-yet undefined ‘partial preproposal,’ and that ‘[t]here will be additional changes that will be made that won’t be re-proposed.’ Let us be clear, the current proposal contains such widespread structural and fatal flaws that a complete withdrawal and reproposal in its entirety is the only solution.”
The letter reiterated committee members’ views that the rule, in its current state, significantly deviates from its original form and lacks sufficient evidence and analysis to justify a complete overhaul of the methods used to calculate risk-based capital requirements. It also emphasized the proposal would lead to the most substantial changes in banking regulation since the Dodd-Frank Act.
“Courts have repeatedly made clear that an agency’s final rules must be a ‘logical outgrowth’ of the rules as proposed,” the committee wrote. “Fixing each of the current proposal’s flaws will require ‘broad and material changes’ that go well beyond a ‘logical outgrowth’ of the proposal, thereby requiring reproposal. To be sure, there may be minor recalibrations that are logical outgrowths of the proposal. However, given the interconnectedness of risk-based capital requirements, even recalibrations must be part of any reproposal.”
The committee warned the extensive changes needed to address the proposal’s issues go beyond this standard and called on the Federal Reserve to avoid potential legal and reputational risks by reproposing the rule in its entirety.